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IT’S CUTE, IT’S HIGH-TECH, it seats four, it gets a world-best 77 miles to the gallon—and Americans can’t have it.

The Volkswagen Lupo 3L TDI is already saving fuel on European roads, but it won’t qualify for any of the $4 billion in subsidies for "alternative-fuel vehicles" in the Bush administration’s new energy plan. Why not? Because federal regulators and the environmental lobby frown on its technology—diesel power. This is unfortunate, because the availability of diesel cars—which have captured 32 percent of Europe’s new car market—could give efficiency-conscious American consumers a real choice.

According to Energy secretary Spencer Abraham, auto mileage of 60 miles per gallon is possible in the United States—but only through massive government investment in experimental technologies like battery-powered electrics, fuel cells, and electric-gasoline hybrid engines.

But several diesel passenger models easily attain 60 mpg or better, surpassing gas/electric hybrids like the Honda Insight and Toyota Prius—at lower cost, and with negligible emissions of "greenhouse" gases. Moreover, gas stations for diesel cars are already in place—unlike the infrastructure needed for electric or hydrogen-powered fuel cells. So why is the Bush administration intent on squandering taxpayer dollars to reinvent the wheel?

One reason is the difference in political agendas between American environmentalists and regulators and their European peers. European greens have embraced diesel as the most practical solution to reduce greenhouse-gas emissions. American greens, on the other hand, refuse to accept the trade-off of fewer greenhouse-gas emissions for marginally higher levels of emissions such as smog-forming nitrogen oxides (Nox) and soot particles. The higher heat of diesel combustion yields more Nox and soot than does a conventional engine.

More by Diane Katz

"We discourage diesels because they may get you a quick and dirty fix, but you’ll be sacrificing our lungs," says Ann Mesnikoff, the Sierra Club’s Washington representative for global warming.

But the extent of the health risk is highly uncertain. The data the Environmental Protection Agency marshals to justify its diesel crackdown are hopelessly dated—reaching back 50 years in some cases, when diesels spewed black clouds of exhaust like chugging locomotives. Today’s models emit 63 percent less Nox and 83 percent less soot than their predecessors.

No matter. The EPA has crafted strict new emissions requirements to take effect in 2004. Automakers admit they’re puzzled about how to comply. These higher standards would be much easier to meet if the sulfur content of diesel fuel were reduced, as it is in Europe. But the EPA’s new fuel-sulfur limits are not mandated to take effect until 2006—well after the deadline for automakers to comply with the more stringent emissions requirements. Consequently, engineers will be forced to redesign diesel technology twice.

Perhaps signaling a legal challenge, General Motors has requested that the EPA revise its deadlines to allow diesels to take hold here. Analysts estimate that if these regulatory barriers were overcome and diesel’s market share grew to European levels, American petroleum consumption would decline by some 345,000 barrels a day.

This assumes that a large number of Americans would find the diesel option attractive in a market where gas prices are half those in Europe. European pump prices frequently top $4 a gallon, which has driven auto industry competition for fuel-efficient models. Among the options offered, diesel is the most reliable, affordable, and efficient by far. Six of the eight most gas-stingy models in Germany are powered by diesel engines.

But the European experience also shows how difficult it is for alternative fuels to compete with the extraordinary performance of gasoline engines. Having taxed fuel excessively, European regulators offer huge tax incentives for customers to buy diesels. In France, for example, where diesel’s market penetration is over 50 percent, taxes drive gasoline prices to nearly $4 a gallon, while diesel—exempt from most of the same taxes—can be had for "only" $2.80 a gallon. In Germany, federal tax credits help ease the sticker shock of the Lupo’s sophisticated diesel technology (priced 30 percent higher than the competition). Even so, the Lupo remains a low-volume seller.